Clean Money

Terrorism has changed the world over the last five years, and nowhere is that more evident than in the need for anti-money laundering (AML) software for financial services companies in the United States. Federal regulations have spurred AML solutions in this country as insurers and other financial services deal with global financing issues, some of which help finance terrorist activities.

Neil Katkov, group manager, Asia research for Celent, maintains the AML needs of insurance carriers have not been as great as the banking and brokerage sectors, because transactions for carriers–policy applications, claims, and payouts–generally are on multiday batch cycles, which allow carriers more time to analyze suspicious activity.

Regulators have seen less risk for money laundering in the insurance sector, points out Katkov, and have not come down as hard on carriers. That has led to a comfort level for insurers, resulting in the implementation of what Katkov views as simpler solutions, often built in-house. He believes the mood of regulators could change, though, requiring more stringent procedures from the insurance sector. Regulators may focus more attention on the insurance industry, he indicates, as the Financial Action Task Force and other international bodies have detected increases in money-laundering activity in the insurance sector over the past few years.

Institutions should be careful to perform due diligence on the claims made by vendors, advises Katkov. If a solution meets a company's analytics and scalability requirements, strong case management functionality is crucial. "The biggest headache compliance departments face is how to sift through the voluminous alerts generated by AML systems, divvy them up among their analysts, and investigate them effectively," he says. "This is where case management and workflow come in."

In his recent report, "Evaluating theVendors of Anti-Money Laundering Solutions 2006," Katkov comments the growth rate for AML software–5.9 percent–may not excite equities analysts, but he feels the number is typical of specialized financial services software. In a similar study in 2003, he observed spending was directed toward business process and reducing labor costs with a small proportion spent on software.

The 2003 analysis was based on estimates of how much money financial institutions would spend. "Many institutions, especially smaller ones, managed to cover AML requirements through manual processes or evade them altogether," Katkov says. "Some firms, especially in the insurance industry, were building focused, lean solutions in-house."

Celent's new spending projections are based on estimated revenues of AML software companies. Katkov asserts this will prove to be a more accurate approach to evaluating the size of the market. "Our new estimates for software spending are higher than our estimates three years ago," he says. "More high-profile institutions are spending a lot of money on AML due to receiving greater attention from regulators and [the institutions'] sensitivity to reputational risk."

He expects to see continued spending on AML. Recent acquisitions indicate the AML software industry is being valued rather highly by the market precisely because of this steady revenue potential, according to Katkov. "The reason this should matter to financial institutions is it indicates today's AML vendors will be around tomorrow, and institutions can count on continued support from their vendors," he says.

The fact AML vendors are being acquired by large software conglomerates indicates the software is entering a stage of maturity, explains Katkov. "Firms that may have been shaky on their own will be all the more stable with these deep-pocketed owners behind them," he concludes.